Ec-10 Midterm #2 Review Guide

Ec-10 Midterm #2 Review Guide - Brian Plancher September...

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Brian Plancher September 27, 2009 Ec-10 Midterm #2 Review Guide Textbook Unit 3 2 nd half: Markets and Welfare o Chapter 8: The Costs of Taxation Government revenue = size of tax * quantity sold with tax The Deadweight loss associated with a tax is the triangle between supply and demand from the original equilibrium quantity to the new quantity sold with the tax in place. This occurs because a tax prevents some buyers and sellers from realizing gains from trade as it artificially changes prices The more elastic the curves are the greater the DWL The marginal tax rate (the tax on one more dollar of earnings) is ~40% People may chose to illegally work in the underground economy to avoid taxes DWL depends on the square of the size of the tax (bigger taxes thus equal exponentially bigger DWL) Laffer curve is an upside-down parabola and is the tax revenue (y) as determined by tax size (x) showing that there are diminishing returns for huge taxes because the distortion in Q will outweigh the size of the tax and since revenue is size*Q they won’t make anymore $ Basis for tax cuts with supply side economics was the idea that the government was on the downward sloping side of the curve because tax rates were too high and disinsentivised work Notes from Text Boxes: Henry George advocated a single tax on land in 1800s because since the supply on land is perfectly inelastic the land owners would bear the entire burned of the tax and the DWL=0. However, the value of land comes with not only the land but improvements made to the land such as roads and power lines, etc, and thus this would distort incentives to improve land (Friedman though says unimproved land tax is best tax), but it wouldn’t raise enough revenue for today’s government. High taxes in industrialized nations correlates with less working hours by people in a week (so if we raise taxes a lot people will work less and the government won’t get more $) o Chapter 9: International Trade If the World Price is greater than the domestic price then the nation with export if it is lower the nation will import goods. Gains and losses of exporting: The domestic price rises to the world price Thus Qs will be greater than Qd because more will be supplied at this price. The Qs-Qd = Quantity exported. Producers will sell many more units, more than is lost by consumers and the nation will gain overall
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Importing is the exact opposite but once again overall gain is positive. If a nation is an importing the government can put a tariff in place which raises the price of imports by the size of the tariff. This results in higher prices than under free trade and a dead weight loss. INSERT TARIFF PICTURE An import quota will shift the supply curve the size of the quota to the right at the point where supply hits the world price. This will also have a DWL associated with it.
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Ec-10 Midterm #2 Review Guide - Brian Plancher September...

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